On course: The growth of key non-oil sectors supports long-term strategic plans

As the largest and most populous of the seven emirates that make up the UAE, Abu Dhabi plays a central role in the federation’s economy. Furthermore, due to being the home of the national capital, Abu Dhabi hosts many of the institutions that orchestrate the UAE’s social and economic development, while the hydrocarbons resources which fall within its jurisdiction have enabled it to invest in both the health and education, as well as the infrastructure needed to realise its long-term goal of diversifying the economy away from a reliance on oil and gas revenues. This ambition continues to occupy government planners, and the evidence suggests that the emirate has succeeded in nurturing new economic sectors and is on track to meet its goals.

Oil & Gas

Abu Dhabi became a member of the Organisation of the Petroleum Exporting Countries in 1967, before the formation of the UAE, and since that time has been a significant player in the international oil market. At the close of 2012 the UAE’s proven oil reserves stood at 97.8bn barrels, according to BP’s “Statistical Review of World Energy 2013”, and around 92.2bn barrels of that total fall within Abu Dhabi. The oil and gas sector, therefore, plays a dominant role in the local economy, accounting for 56.5% of GDP at current prices in 2012, according to the “Abu Dhabi Statistical Year Book 2013”. Oil production in the emirate has recently reached a level of 2.6m barrels per day (bpd), while the Abu Dhabi National Oil Company (ADNOC) has plans to boost this figure to 3.5m bpd by 2017.

The emirate has also turned its attention to increasing gas reserves and production, and to that end has successfully developed its first unconventional sour gas field, while ongoing carbon capture projects promise to make the large volumes of natural gas that are currently re-injected into oil fields available for much-needed electricity generation.

Other Key Sectors

The wealth engendered by oil and gas activity in the emirate has fostered the growth of a sizeable construction sector, which in 2012 was the second-largest contributor to GDP at current prices, accounting for 9.6% of the total. According to Statistics Centre - Abu Dhabi (SCAD), within the emirate, the region of Abu Dhabi accounted for 74% of building completions in 2012, which included residential, commercial and industrial structures, while Al Ain and Al Gharbia accounted for 19% and 7%, respectively.

Manufacturing represents the third-largest economic sector in Abu Dhabi, contributing 5.9% of total GDP and 13.4% of non-oil GDP at current prices in 2012, and has been identified as a key area of future growth by the emirate’s economic planners. The most significant manufacturing activity in terms of gross output is the chemicals and plastics segment, which had total production of Dh110bn ($29.9bn) in 2011, according to the “Abu Dhabi Statistical Year Book 2013”, demonstrating the emirate’s success at directing some of its hydrocarbons resources into downstream light and heavy industry. Other significant segments contributing to the gross manufacturing output of Dh177.5bn ($48.3bn) for the year 2011 included basic metals (Dh16.3bn, $4.4bn); non-metallic mineral products excluding oil (Dh12.6bn, $3.4bn); structural metal products (Dh11.7bn, $3.2bn); machinery and equipment (Dh9.3bn, $2.5bn); food, beverages and tobacco (Dh6.9bn, $1.9bn); and textiles, garments and leather products (Dh1.9bn, $517.2m).

Real Estate

The fourth-largest contributor to GDP is the real estate sector, which accounted for 4.4% of the total in 2012. Its strong showing is attributable to an incipient recovery in the real estate market, underwritten by an improving economic backdrop and the UAE’s status as a safe haven in what has, since 2011, become a turbulent region. However, the country’s ability to attract property investors is not a recent development: between January 2003 and July 2013, the real estate sector attracted more foreign direct investment (FDI) than any other, according to the fDi Intelligence division at the Financial Times, for a total of $5.5bn.

As Syed Basar Shueb, the CEO of PAL Group, told OBG, there has been an increase in public expenditure as many projects that had been delayed are now coming back on-line. “This renewed commitment has provided investors with greater confidence, and while it has not necessarily provided immediate benefits to the private sector, it has set a foundation that, in time, will result in more opportunities,” Shueb told OBG.

However, according to Ahmed Mohamed Al Dhaheri, chairman of Bin Salem Investment, an Abu Dhabi-based business group, “Real estate and education are both prime examples of industries that could benefit from an increased level of private-sector participation. The government recognises this and there has been a noticeable shift in its commitment to support private investment in these sectors.”

Abu Dhabi is also home to a vibrant financial sector, which in 2012 accounted for 3.8% of GDP. Comprised of some of the largest banks in the country, led by National Bank of Abu Dhabi (NBAD), an array of insurance operators and a capital markets component centred on the Abu Dhabi Securities Exchange, the sector will soon receive a further fillip with the creation of a new financial free zone, Abu Dhabi Global Market, to be established on Al Maryah Island (see analysis).

Other areas of the economy that are playing an important part in the development of the emirate include the transport sector, which accounted for 3.6% of GDP in 2012 and is being buoyed by the expansion of the Midfield Terminal of Abu Dhabi International Airport and the Etihad Railway project (see Transport chapter); the wholesale and retail sector, which contributed 3.5% to GDP in 2012 and is benefitting from a wealthy and rapidly expanding population; and the information and communications technology sector, which contributed 2.2% to GDP over the same period.

Plans For The Long Term

While the oil and gas sector continues to dominate the economy in terms of output, the sizeable revenues which it generates have granted the government considerable capacity to invest in efforts to diversify the economic base. The manner by which it intends to go about this task is laid out in the Abu Dhabi Economic Vision 2030 strategy document. Formulated in 2008, the 22-year strategy seeks to establish a “safe and secure society and a dynamic, open economy”, and identifies a number of economic priorities: building an open and globally integrated business environment; adopting a disciplined fiscal policy that is responsive to economic cycles; establishing a resilient monetary and financial market environment with manageable levels of inflation; improving the efficiency of the labour market; developing infrastructure capable of supporting economic growth; and enabling financial markets to become the key financiers of economic sectors and projects.

The plan proposes that by 2030 the contribution of the oil and gas sector to GDP should be reduced to 36%, and highlights a number of key sectors with significant potential for expansion, such as tourism, manufacturing, logistics, health care, education, financial services, aerospace and telecommunications. The strategy’s implementation has been broken down into phases of five years, the first of which ran from 2008 to 2012 and was focused on the areas of economic liberalisation, industrial infrastructure, and supporting small and medium-sized enterprises (SMEs).

The evidence to date suggests that the government’s efforts are beginning to yield results. Oil and gas is estimated to have accounted for 62.4% of real GDP in 2001 and 59.3% in 2005, compared to today’s level of 52%, while according to SCAD, the emirate’s non-oil GDP grew by 7.7% in 2012, compared to 6.7% in 2011. The diversification of Abu Dhabi’s economy away from its reliance on oil and gas revenues, therefore, appears to be on track, and the emirate can now turn its attention to the implementation of its second five-year plan. In October 2013 the committee supervising the economic plans announced that it was in the process of assessing a range of economic sectors in order to finalise the next five-year phase of development, with a view to identifying the key priorities for this period.

Emerging Sectors

A number of fledgling industries are already developing, and these will provide a basis for future economic expansion in accordance with the strategy laid out by Economic Vision 2030. For example, aviation and aerospace have been identified as key economic pillars for future development, with Etihad Airways and Abu Dhabi Airports (ADAC) leading the sector, which is comprised of aircraft operators, parts manufacturers, and maintenance, repair and overhaul service firms. Recent years have seen significant investment in the aerospace segment as the emirate has sought to establish itself as an aerospace hub.

Much of these efforts have been directed to the Nibras Al Ain Aerospace Park, which is being jointly developed on a 25-sq-km plot by Mubadala Aerospace and ADAC as a multi-faceted industrial facility aimed at supporting the commercial aircraft manufacturing industry (see Security, Aerospace & Defence chapter).

The requirements of a more complex economy, as well as the demand generated by an expanding population, are also fuelling rapid expansion in the education sector. The improvement of schools and universities is identified as a key goal by Economic Vision 2030, and significant investment in education services has resulted in a decline in the illiteracy rate in Abu Dhabi from 12.6% in 2005 to 7.5% in 2011, according to SCAD. While the federal Ministry of Education oversees the nation’s K-12 education system, the Abu Dhabi Education Council controls education activities at the operational level, including the development of infrastructure, formulation of curricula and cooperation with the private sector. Opportunities for private investment abound in Abu Dhabi’s dynamic education ecosystem, where over 180 private schools – many owned by foreign firms – offer education according to a range of curricula, such as American, British and Indian.

Health

Similar growth has also been seen in Abu Dhabi’s rapidly expanding health care sector, with the number of hospitals in the emirate expanding from two in 1975 to 39 in 2012. Private sector investment has played a significant role in this development across the primary, secondary and tertiary care levels, and improvements in the health insurance system, greater health financing and an increasingly favourable climate for health insurance companies have combined to bring about an overall expansion in treatment services.

ICT

The information and communications technology (ICT) industry, meanwhile, has benefitted from the growing business sector and relatively affluent consumer base. The government of Abu Dhabi has taken the lead in the sector’s development, mandating the Abu Dhabi Systems and Information Centre with spearheading the emirate’s ICT development agenda and tasking it with establishing the government as a “high-performance government delivering world-class services for the benefit of all its customers”.

This ambition is being realised through a number of key initiatives: the Abu Dhabi Government Portal provides access to 99 departments and over 1000 services, some of which are fully integrated e-services; the Abu Dhabi Government Contact Centre allows citizens, residents, tourists, business customers and government employees to access government information and receive support on personal transactions; the Abu Dhabi Spatial Data Infrastructure portal is an e-government programme created to facilitate the sharing of geospatial data among government agencies; and the Jobs Abu Dhabi portal provides a forum for both employers and job seekers in the emirate.

Public Finances

As well as its strategic role in growing the economy, the government’s control of the oil and gas sector, and its sizeable revenues, enables it to direct significant capital towards the emirate’s development goals. Assessing Abu Dhabi's fiscal policy is complicated by the federal nature of the UAE (see analysis). Abu Dhabi and Dubai are the only emirates to contribute to the federal budget, which accounts for less than a quarter of revenue and expenditure. The Dh44.6bn ($12.1bn) federal budget for 2013, announced in late 2012, was part of a three-year, Dh133bn ($36.2bn) federal spending plan that began in 2011, and the preponderance of social spending within it, accounting for 51% of the total, is a result of the UAE’s policy of providing comprehensive, lifelong welfare and support for its citizens.

In October 2013 the federal government announced a new three-year financial plan (2014-16) totalling Dh140bn ($38.1bn), with Dh46bn ($12.5bn) allocated for the first year. However, while the federal figures represent a modest rise in spending, when taking into account the combined federal and emirate budgets, the trend has been one of fiscal consolidation. According to the IMF, in 2013 this fiscal consolidation was on the order of 2% of non-hydrocarbons GDP and was driven by spending reductions by both Abu Dhabi and Dubai.

In Abu Dhabi’s case, this was achieved by cuts to capital spending which, in the IMF’s view, is a return to spending levels “consistent with intergenerational equity”, after a period of increased government expenditure borne of a desire to safeguard the population from the negative effects of the global economic crisis. Nevertheless, Abu Dhabi’s fiscal stance remains expansionary in some areas. In January 2013, the Abu Dhabi Executive Council announced details of a Dh330bn ($89.8bn) spending plan that will be deployed over the next five years. According to the council, a total of 12,500 homes will be constructed across nine major projects, while Dh3bn ($816.6m) in housing loans will be extended over the period – a continuation of a scheme that has seen 6500 loans disbursed to date worth a total of Dh13bn ($3.5bn). Other projects that will benefit from the spending plan include sewage and wastewater works, highways and schools. A notable feature of Abu Dhabi’s fiscal profile is that its public finances are even more robust than is shown in available data. The emirate pays a portion of its oil revenue directly into reserve accounts, not reporting them as current revenue, while the public accounts do not include the significant income derived from the emirate’s portfolio of publicly owned foreign assets. This “reserve liquidity” grants Abu Dhabi considerable flexibility to deal with exogenous shocks.

Monetary Policy

Monetary policy is circumscribed by the pegging of the dirham to the US dollar. Interest rates are set at federal level by the Central Bank of the UAE (CBU), and its ability to address inflationary pressures through rate changes is limited by the need to synchronise them with the actions of the US Federal Reserve. Growing calls for the de-coupling of the dirham-dollar link were ultimately silenced by the onset of the global economic crisis, which saw inflation fall from a high of around 12.3% in 2008 to a low of 1.6% in 2009, according to the National Bureau of Statistics. Subsequently, the priority of the CBU was to boost liquidity and protect the banking sector, although a rise of inflation to 3% in early 2011 brought attention once more to inflation management in the short term. Monetary policy continues to support the US dollar peg, and the policy rate has remained at 1% with a stable spread over the Federal Reserve funds rate since 2008.

According to the IMF, there are few near-term inflationary risks in the UAE, despite the recovery of the real estate market, while a Reuters poll of analysts in September 2013 resulted in an average forecast of 1.5% for 2013 and a modest rise to 2.3% for 2014. At the emirate level, SCAD maintains a consumer price index by which inflation within the emirate can be tracked. Data published by SCAD shows that the inflation rate for consumer prices in Abu Dhabi was 1.3% in 2013 compared with 1.1% in 2012.

Trade

An important measure of Abu Dhabi’s success in diversifying its economy in future years will be its ability to reduce the contribution of hydrocarbons to its total exports. Currently, the export of oil, gas and oil products accounts for the vast majority of goods and products leaving the ports of the emirate. In 2012 hydrocarbons-derived exports amounted to Dh451.5bn ($122.9bn), as compared to Dh15.4bn ($4.2bn) worth of non-oil exports, according to SCAD. Foreign trade plays an important role in the economy, and in 2012 accounted for 65.9% of GDP, and as the effects of Abu Dhabi’s diversification strategy are felt in the medium term, the non-oil component is expected to rise.

Presently, plastics and rubber represent the single-largest non-oil export group (adding Dh8.4bn, $2.3bn, to the export total in 2012), followed by base metals (Dh4.6bn, $1.3bn) and machinery (Dh465.3m, $124.2m). In terms of export markets, Abu Dhabi benefits from a number of trade agreements. At a regional level, Abu Dhabi’s position within the UAE grants it the advantages bestowed by the 2002 Economic Agreement signed between the nations of the GCC, while the UAE’s membership of the Greater Arab Free Trade Area provides it with privileged access to markets in 17 states in the Middle East and North Africa. The UAE has been a member of the World Trade Organisation since 1996, and as a leading member of the GCC negotiation team, it is at the forefront of talks to establish free trade zones with a number of significant markets, such as the EU, Japan, China, India and the South American Mercosur bloc, which includes, inter alia, Brazil and Argentina.

Emirate -Level Trade

 Beyond its status as the home of the UAE capital and a lead member of the GCC economic bloc, Abu Dhabi has moved to develop trade at the emirate level. The Trade Incentive Package, which applies to local and international investors in the emirate, offers full income and corporate tax exemptions, and Customs tariffs as low as 5%. An increased emphasis on the protection of intellectual property has resulted in a dedicated commercial protection section at the Abu Dhabi Department of Economic Development, to which owners of trade agencies can report instances of trademark counterfeiting and commercial fraud.

On the other side of the ledger, total imports of Dh119bn ($32.4bn) in 2012, compared to total exports of Dh481.6bn ($131.1bn), gave Abu Dhabi an enviable trade surplus of around Dh362.6bn ($98.7bn) for the year. Machinery represented the single biggest import category over the period, accounting for 32.7% of the total, followed by base metal and vehicles. The US provided the largest amount of goods to the emirate over the year, which at Dh14.3bn ($3.89bn) represented 12.1% of the total, followed by South Korea (11.1% of the total), Saudi Arabia (10.1%), Germany (8.3%), Japan (8.3%), Italy (7.5%), the UK (4.3%) and China (3.4%).

Abu Dhabi’s well-developed transportation infrastructure also allows it to act as a hub for re-exports, and its role as a distribution centre has grown in recent years. Re-exports in 2012 were valued at Dh14.7bn ($4bn), according to SCAD, compared with Dh11.6bn ($3.2bn) in 2011. As with imports, machinery accounted for the single largest share of movements, at 48.7% of total re-exports, and nearby Bahrain was the principal recipient, receiving goods worth Dh3.9bn ($1.1bn) from Abu Dhabi’s ports over the year.

Stimulating Growth

At the country level, building on the UAE’s already robust trading base has remained a priority for the government. Progress to date has positioned it well for future trade expansion efforts. According to the World Bank’s “Doing Business 2014” report, the UAE ranks fourth in the world in terms of trading across borders – a measurement that takes into account rankings on the number of documents, and the time and cost required to export and import. Goods transported across the UAE’s borders and through its ports are subject to a unified GCC Customs tariff of 5% of the cost, insurance and freight value, although the nation offers exemptions on various items, such as personal effects; raw materials for manufacturers; imports of any kind for diplomatic missions, military and internal security forces; and contributions to charitable organisations. Moreover, goods manufactured in the GCC can be exported duty-free to any other GCC member state if the manufacturing process involves a minimum of 40% added value and the manufacturer is at least 51%-owned by GCC nationals.

Looking further ahead, a number of other sectors stand to benefit from the emirate’s growth strategy. Despite the local abundance of oil and gas resources, Abu Dhabi is committed to developing alternative energy infrastructure, an effort that is being driven by Masdar – a state company that is investing in new-energy initiatives in the emirate and around the world. The tourism sector is also emerging as a potentially important component of the economy, with Yas Island – home to the region’s first “links” golf course, seven hotels, Ferrari World Abu Dhabi, Yas Waterworld and a public beach – emerging as the premier entertainment district. Finally, underpinning all of this activity is an expanding public transportation sector, which is being developed as a multi-modal system comprising metro, light rail and water taxis that will add to the emirate’s already established air and sea routes.

Foreign Direct Investment

 While government spending and locally derived investment are playing key roles in the social and economic development of Abu Dhabi, boosting the amount of incoming FDI is central to the government’s long-term planning. Part of this effort involves ensuring that the emirate is globally perceived as a desirable place to do business, and to this end the Economic Vision 2030 strategy calls for further progress in achieving higher international competiveness rankings, such as the World Bank’s “Doing Business” report and the World Economic Forum’s (WEF) “Global Competitiveness Report”. The UAE has performed well in this area, ranking 19th out of 148 countries in the 2013 WEF comparisons with a score of 5.11 out of a maximum of 7, while its ranking in the ease of doing business improved from 26th in 2013 to 23rd in the 2014 World Bank report.

The Abu Dhabi Department of Economic Development has been tasked with creating an investment climate that can attract national and foreign capital, and to this end it has embarked on a review of all economic laws in force locally. It has already greatly simplified the process of obtaining a commercial licence in the emirate by acting as a central portal for licence seekers and securing facilitation agreements with around 30 government departments. Through SCAD, itself a product of the Economic Vision 2030 strategy, Abu Dhabi has also taken steps to gain a deeper insight into the levels of FDI specific to the emirate, and in 2011 began to provide a detailed breakdown. According to SCAD, FDI to Abu Dhabi reached Dh52.5bn ($14.3bn) in 2011, a 7.8% rise on 2010, buoyed by foreign interest in the real estate sector. The manufacturing sector was the second-largest recipient of foreign capital, and grew its take by 26.5% in 2011 (see analysis).

Free Zones

A federal Companies Law in place since 1984 limits foreign ownership to 49%. Abu Dhabi has, however, established a number of free zones which can sidestep this requirement. The first of these, the twofour54 media zone, was established in 2007, and since that time has succeeded in attracting more than 250 companies involved with TV, film and digital media, including international giants such as the BBC, CNN, the Financial Times and the Thomson Reuters Foundation as well as local start-ups. ADAC, which operates the Abu Dhabi International, Al Bateen Executive and Al Ain International Airports, has also been granted free zone status at each of those locations. The most prominent of these is Abu Dhabi Airport Business City, which has become a hub for catering, fuel, cargo, logistics and light manufacturing. The free zone at Al Ain, meanwhile, has built up a cluster of businesses focused on aerospace manufacturing, training, maintenance and engineering, while activity at Al Bateen is centred on the servicing of private aircraft. Companies operating in the three zones enjoy exemptions from duties on imports, on-site Customs inspection, one-stop administration services and swift cargo clearance.

Another important zone, offering both free and non-free zone options, is developing at Taweelah, where Khalifa Industrial Zone Abu Dhabi (Kizad) has established specific industrial clusters for companies specialising in areas such as aluminium, base metals, glass, paper and food processing, to name a few. Kizad has already launched Area A, which is now fully operational and has investors beginning operations in 2014. The zone currently includes a container and industrial port and by the time the project is fully complete in 2030, more than 100 sq km of space will be available to investors.

Abu Dhabi is also home to what has been described as the world’s first cleantech cluster, Masdar City, which was established as a centre to research and develop renewable energies. Masdar City has been designed to become one of the most sustainable cities in the world. The 6-sq-km complex is located 17 km from the city centre of Abu Dhabi, and is already home to the Masdar Institute of Science and Technology, an independent, research-driven graduate-level university focused on advanced energy and sustainable technologies, and the International Renewable Energy Agency. From a business perspective, Masdar City seeks to establish itself as a living laboratory and test-bed for new technologies, and a magnet for global cleantech talent.

The free zone model has worked well for Abu Dhabi, and in 2013 details were released concerning a new development which promises to significantly expand the concept in the emirate. Al Maryah Island, already the site of a new mixed-use financial, retail, residential, leisure and commercial development, is to be established as a financial free zone with its own regulatory system, legal structure and inventory of incentives. Its launch will represent a significant step in the development of the Abu Dhabi’s economy, and has the potential to spur new growth in the already vibrant financial sector (see Capital Markets chapter).

Labour Market

Abu Dhabi’s efforts to attract FDI in large volumes, and across a wide range of sectors, highlight one of the emirate’s most salient developmental challenges. Like many GCC states, Abu Dhabi’s demographic profile reveals that many of the employment opportunities created by its economic expansion have been taken by a growing expatriate segment, while unemployment amongst the indigenous population remains relatively high by global standards.

This characteristic has remained entrenched as the labour force has expanded over the past four decades: from 532,861 in 1995, when 8% of the labour force was Emirati, to 1,443,700 in 2011, by which point the Emirati component had increased slightly to 9.1%, according to SCAD. Emirate-level data also reveals a large discrepancy between male and female employment rates in Abu Dhabi, with women accounting for 16% of the total workforce in 2012. While this trend is less pronounced amongst Emirati workers (where women account for 31.7% of workers) than among non-nationals (where 14.5% of the labour force consists of women), the divergence in male and female employment rates has in the past led to calls for governmental action.

Both the general question of Emirati employment and the more specific issue of women in the workplace have in recent years become high-profile concerns for both the government and the government-related companies that play an important role in the local economy. The latter have lead efforts to boost the number of Emiratis participating in Abu Dhabi’s economic life: Abu Dhabi Islamic Bank, for example, set itself an ambitious target of 50% Emiratisation by 2012, which saw it grow the proportion of local staff on its books from 34% in 2008 to 48% in 2011, while more than half of NBAD’s branch managers in the UAE are women.

The government has traditionally absorbed much of Abu Dhabi’s Emirati workforce, and in 2011 around 64.4% of Abu Dhabi’s nationals were employed in the public administration or defence sectors. “2013 was designated as the ‘Year of Emiratisation’, but it was still a challenge to fill certain roles with Emiratis – jobs in the public sector remain more popular,” Peter Michelmore, senior partner for the Middle East at international legal firm ReedSmith, told OBG.

Public Sector

 The public service remains popular with citizens thanks to generous benefits and a perception that private sector employment is more onerous and lacks security; however, as the population expands, the government is finding it increasingly challenging to provide employment opportunities directly to its citizens. This issue is acknowledged in the Economic Vision 2030 document, which establishes the provision of more employment opportunities in the private sector as a strategic priority. The government has adopted a multi-faceted approach in its efforts to realise this ambition, investing in education and training initiatives to enhance the skills of citizens, as well as establishing job placement programmes to help Emiratis find employment.

The government has also sought to encourage increased private sector employment of Emiratis by supporting the development of small and medium-sized enterprises (SMEs) – a segment that has become central to the efforts to diversify the economy away from its reliance on hydrocarbons. The government’s most significant tool for the creation and development of SMEs is the Khalifa Fund, launched in 2007.

The fund works to create a culture of investment and entrepreneurship among the emirate’s young people, providing a support system for new businesses that encompasses financing, training, development, data and consulting services (see analysis).

Business Climate

As part of the drive to increase the role of the private sector – and particularly SMEs – in the UAE’s economy, the national government has expended considerable effort in enhancing the general business environment. The UAE’s placing of 23rd out of 189 nations in the World Bank’s “Doing Business 2014” report represents an acknowledgement of the government’s success in this regard, and shows the UAE to have the most favourable business environment in the Middle East, and better than countries such as Japan, Switzerland and Austria.

According to the 2014 report, the UAE made three key reforms during the 2012/13 financial year which helped it gain its high ranking: protection for investors was improved by introducing greater disclosure requirements for annual reports and making it possible to sue directors when they harm a company; accessing electricity was streamlined by eliminating the requirement for pre-connection site inspections; and registering property was made easier thanks to extended opening hours for the land registry and reduced transfer fees.

These reforms had an effect on the country’s ranking in the respective areas, with the UAE gaining three ranks, from 7th to 4th, in terms of getting electricity; in terms of protecting investors, the country jumped to 98th place from 128th the previous year; and registering property improved from 12th place to 4th.

The UAE is ranked in the top 10 globally for five of the 11 categories assessed by the World Bank. In addition to providing electricity and registering property, the UAE is ranked fifth in terms of dealing with construction permits, fourth for trading across borders and first globally in terms of paying taxes.

The government’s reforms with regard to the business environment have underpinned Abu Dhabi and the broader UAE’s competitiveness in a challenging economic environment, but the “Doing Business 2014” report also revealed that there is still room for improvement in some areas of the nation’s legal framework. For example, despite the improvements made in 2012/13, the UAE still scores relatively poorly in terms of protecting investors, and more work is needed in terms of credit availability, enforcing contracts and resolving insolvency. Addressing systemic challenges such as these will likely be a high priority for the government over the coming years as the nation fine-tunes its development strategy.

Tax

The UAE’s high ranking regarding taxation in the “Doing Business 2014” report helps to make Abu Dhabi a favourable destination for businesses of all sizes. The UAE does not levy a capital gains or withholding tax, and the only entities which pay any form of corporate tax are branches of foreign banks and oil and gas firms. There is also no value-added tax, sales tax, goods and services tax, dividend distribution tax, fringe benefits tax, wealth tax, gift tax or estate tax. However, there are municipal levies of 5-10% on food bought in hotel restaurants, 15% on services provided by hotels and a 10-15% charge per night on room rates.

As well as the low level of direct taxation, the burden of indirect taxation on companies operating in the UAE is relatively light. In most of the country commercial and residential tenants pay a modest property tax – usually set by reference to the annual rent of the property, generally at a rate of 5% for residential units and between 5% and 10% for commercial ones. There is also a registration fee of 1% of the value of the sale (imposed on the vendor) and a purchase registration fee (paid by the buyer) of the same amount (see Tax chapter).

Outlook

In recent years the economy of Abu Dhabi has shown its resilience to extraneous shocks, which in turn has allowed the government to successfully pursue its ambitious diversification strategy. According to the IMF, Abu Dhabi’s efforts to broaden its economic base will help drive annual growth of 4% in the non-oil economy over coming years.

The Abu Dhabi government is continuing to pursue investments in the oil and gas sector, with some $52bn earmarked for expansion projects over the next eight years, according to NBAD. However, the emirate is also planning to continue pursuing and stimulating investments in non-oil areas, which will be built on the success already achieved in areas such as downstream petrochemicals, metal production, tourism, transport, health care, financial services, education and media.

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